IFRS S2 Climate-related Disclosures is a sustainability disclosure standard issued by the International Sustainability Standards Board (ISSB) on June 26, 2023.
It is designed to require an entity to disclose useful information about climate-related risks and opportunities for users of general-purpose financial reports, particularly investors, lenders and other creditors.
The IFRS S2 is intended to improve the consistency, comparability and decision-usefulness of climate-related financial information.
The standard focuses on climate-related risks and opportunities that could reasonably be expected to affect an entity’s cash flows, access to finance or cost of capital over the short, medium or long-term.
It covers two broad categories of climate-related risks: physical risks and transition risks.
Physical risks arise from climate-related events or longer-term changes in climate, while transition risks arise from changes associated with moving toward a lower-carbon economy, including changes in policy, technology, markets and consumer behaviour.
Climate-related opportunities are also within its scope.
IFRS S2 is closely connected to IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.
IFRS S2 provides the climate-specific requirements, while IFRS S1 supplies the general framework for preparing sustainability-related financial disclosures.
The two standards use the same four core content areas: governance, strategy, risk management and metrics and targets.
IFRS S2 also incorporates the recommendations of the former Task Force on Climate-related Financial Disclosures (TCFD).
An entity applying IFRS S2 identifies climate-related risks and opportunities that could reasonably be expected to affect its prospects.
The information disclosed should be material to users of general-purpose financial reports.
The objective is not simply to report environmental activity; rather, the emphasis is on information that can help users assess how climate-related matters may affect the entity’s financial prospects and decisions about providing resources.
IFRS S2 became effective for annual reporting periods beginning on or after January 1, 2024.
The four core content areasGovernance
Entities must disclose information about the governance processes, controls and procedures used to monitor, manage and oversee climate-related risks and opportunities.
This includes identifying the governance body or individuals responsible for oversight, explaining their responsibilities and describing management’s role.
Relevant information may include how often the responsible body is informed, how responsibilities are reflected in terms of reference or policies, and whether climate-related considerations are incorporated into performance management or remuneration.
The purpose is to allow users to understand whether climate-related matters are embedded in the entity’s governance structure and decision-making processes, rather than being treated as a separate environmental activity.
Strategy
The strategy disclosures explain how climate-related risks and opportunities affect the entity’s business model, value chain, strategy and decision-making.
An entity describes material climate-related risks and opportunities and identifies whether they are physical or transition-related.
It also considers their current and anticipated effects over the short, medium and long-term.
Entities are expected to explain the effects of climate-related matters on their financial position, financial performance and cash flows.
Where relevant, the disclosure may address changes in revenue or costs, capital expenditure, financing, asset values, supply chains and business operations.
The entity should also explain its strategy for responding to identified risks and opportunities, including any transition plans or adaptation measures.
A major feature of IFRS S2 is disclosure about climate resilience.
Entities must provide information that enables users to understand the resilience of their strategy and business model to climate-related changes, developments and uncertainties.
This assessment is informed by climate-related scenario analysis.
IFRS S2 does not prescribe one particular scenario; the approach should be appropriate to the entity’s circumstances and provide decision-useful information.
Risk management
Entities must explain the processes used to identify, assess, prioritise and monitor climate-related risks and opportunities.
They should disclose how these processes work and whether they are integrated into the entity’s overall risk-management process.
Users should be able to understand how climate-related risks are identified and evaluated relative to other business risks.
The risk-management disclosure therefore links climate matters with mainstream enterprise risk management.
It can include information about risk assessment criteria, prioritisation methods, monitoring procedures and how climate-related risk information is incorporated into overall risk decisions.
Metrics and targets
IFRS S2 requires entities to disclose metrics and targets used to measure and manage climate-related risks and opportunities.
The disclosures include cross-industry metrics, industry-based information and climate-related targets.
Cross-industry metrics include greenhouse gas (GHG) emissions, exposure to climate-related transition risks, exposure to climate-related physical risks, climate-related opportunities, capital deployment toward climate-related risks and opportunities, internal carbon prices where used and the proportion of executive management remuneration linked to climate-related considerations.
The GHG emissions disclosures cover Scope 1, Scope 2 and Scope 3 emissions, subject to the requirements and measurement provisions of IFRS S2.
Scope 1 emissions are direct emissions from sources owned or controlled by the entity; Scope 2 relates to indirect emissions associated with purchased or acquired energy; and Scope 3 generally covers other indirect emissions occurring across the entity’s value chain.
Scope 3 measurement can involve significant estimation and requires careful attention to the applicable measurement framework.
The writer is a chartered petroleum economist, a tax and management consultant and CEO of the Centre for Professional Studies, Ho.
Email:
